Abstract

1. Introduction

Developing countries can use capital management techniques to strengthen financial stability, support good macroeconomic and microeconomic policies and boost investment. Countries have, in fact, employed these techniques during the 1990s; and so we consider the experiences of five such countries.

We use the term capital management techniques (CMTs) to refer to two complementary (and often overlapping) types of financial policies: policies that govern international private capital flows, called capital controls, and those that enforce prudential management of domestic financial institutions. A strict bifurcation between capital controls and prudential regulations often cannot be maintained in practice. Policymakers frequently implement multifaceted regimes of capital management, as no single measure can achieve the diverse objectives.

Moreover, the effectiveness of any single management technique magnifies the effectiveness of other techniques and enhances the efficacy of the entire regime of capital management. For example, certain prudential financial regulations magnify the effectiveness of capital controls (and vice versa). In this case, the stabilizing aspect of prudential regulation reduces the need for the most stringent form of capital control. Thus, a program of complementary CMTs reduces the necessary severity of any one technique and magnifies the effectiveness of the regime of financial control.

The research program of the Group of 24 is the world's only research effort devoted to evaluating the international economic system from the perspective of developing nations' needs. Multilateral development banks and other research organizations may put out a larger volume of studies, but their mandate and intended audience are not as clearly defined as the G24's. This makes the papers produced under the auspices of the G24 very special. Nowhere is the voice of the developing nations expressed as cogently and powerfully as in these papers.

This volume continues a tradition of dissemination that has long been part of the G24 agenda. It includes chapters on some of the most burning issues on the agenda: reform of the IMF and its conditionality, debt workouts and restructuring, management of capital flows, efficacy of self-insurance against crises, debt sustainability in the HIPC countries, poverty-reduction strategy papers (PRSP), international public goods, and the Millennium Development Goals and the ‘global partnership for development’. Readers will find fresh and controversial perspectives in each of these chapters.

Separating hype from fact and promise from reality has always been a hallmark of the G24 research tradition. If you are doubtful that there exist effective mechanisms for improving the governance of the IMF and its conditionality, read the chapters by Buira. If you believe that the HIPC initiative has a solid chance of placing poor countries on the path of debt sustainability, read the chapter by Gunter.

Abstract

In the context of the financial governance of the IMF, what are the equity implications of the manner in which the IMF distributes the cost of running its regular (non-concessionary) lending operations as well as the modalities of funding its concessionary lending and debt relief operations? While the IMF charges borrowers roughly what it pays its creditor members for the resources used in its regular lending operations, its overhead costs (administrative budget plus addition to reserves) are shared between the two groups of members in a less equitable manner. With the overhead costs rising inexorably to meet an increasing number and range of responsibilities being placed upon the institution – largely at the instance of the IMF's principal creditors by virtue of their dominant majority of voting power – the under-representation of the IMF's debtors undermines the legitimacy of its decision-making. With regard to the concessionary lending and debt-relief operations, some of the IMF's funding modalities have involved a substantial contribution by IMF debtors, sometimes under pressure. While this has been accepted as part of an intra-developing country burden-sharing exercise, it has also meant a significant burden shifting away from the developed countries in the cost of meeting their responsibilities to the poorest members of the international community.

Introduction

An important aspect of governance at the IMF relates to the cost of running the institution and the sharing of that cost between the industrial countries (the IMF's principal creditors) and low-income countries and emerging market economies (primarily borrowers).

Abstract

This chapter builds on the emerging consensus in the development literature that the enhanced HIPC Initiative does not fully remove the debt overhang in many poor and highly indebted countries. It examines the six most crucial problems of the enhanced HIPC initiative: the use of inappropriate eligibility and debt sustainability criteria; the use of overly optimistic growth assumptions; insufficient provision of interim debt relief; the delivery of some HIPC debt relief through debt rescheduling; non-participation and financing shortfalls of creditors; and the use of currency-specific short-term discount rates to calculate the net present value (NPV) of outstanding debt. To address these shortcomings, the chapter suggests: revising the HIPC eligibility and debt sustainability indicators; using lower bounds of growth assumptions; providing deeper and broader interim debt relief; delivering HIPC debt relief only through debt cancellation; adjusting the current equal burden-sharing concept by releasing the HIPC Trust Fund resources immediately to finance-constrained small regional MDBs; exempting minor creditors from the provision of HIPC debt relief; and using a single fixed low discount rate for all NPV calculations. However, even with these changes, the long-term debt sustainability of HIPCs would remain fragile. The chapter argues that more aid coordination is urgently needed for HIPCs that have not yet reached their decision points; that it makes sense to substitute some loans with grants; that HIPC debt relief has thus far been neither frontloaded nor additional and that 100 per cent debt relief would be feasible as well as desirable for the poorest debtors, irrespective of what their debt levels are.

Abstract

How robust has the ratio of international reserves to short-term external debt been as an early warning indicator of external vulnerability and currency crisis? We examine this issue and, in particular, analyse the significance of the reserve ratio's predictive power and its sensitivity to the database used by estimating regression coefficients for a number of explanatory variables using Probit and Logit methods. The data cover 15 episodes of crisis during 1985 to 2001 in nine emerging-market countries from Latin America and Asia. Our econometric results firmly support the notion that the reserve ratio is a strong indicator of currency crisis and external vulnerability, but its relative significance varies with the source of the data on short-term debt. We also estimate the vulnerability threshold value of the reserve ratio and draw a highly unconventional conclusion: The minimum threshold value of approximately 1 is a reasonable guide to an emerging-market country's reserves policy; higher levels of reserve ratio, while costly to maintain, do not make a country less vulnerable to external crises. Finally, we examine the predictive power of the reserve ratio by using alternative measures of international reserves and short-term debt in the case of 1994 Mexican crisis. Two key findings emerge. First, some of the methodological adjustments recommended by the IMF for calculating the reserve ratio are indeed highly significant. Second, the market amortization component of short-term debt (amortizations of external debt held by private foreign investors scheduled over the next 12 months) is a much more powerful indicator of potential liquidity problem that total short-term external debt (total amortizations over the next 12 months).

Abstract

The global international financial institutions (IFIs) increasingly justify their operations in terms of the provision of international public goods (IPGs). This is partly because the rich countries of the North appear to support expenditures on these IPGs, in contrast to the ‘aid fatigue’ that afflicts the channeling of country-specific assistance. But do the IFIs necessarily have to be involved in the provision of IPGs? If they do, what are the terms and conditions of that engagement? How does current practice compare to the ideal? And what reforms are needed to move us closer to the ideal? These are the questions I ask in the framework of the theory of international public goods, and in light of the practice of international financial institutions, the World Bank in particular. For the World Bank, I draw a series of specific operational and resource reallocation implications.

Introduction

When people talk of the international financial institutions (IFIs), they usually mean the two Bretton Woods institutions, the International Monetary Fund and the World Bank. Of course, strictly speaking, any multilateral organization with financial operations is an IFI – for example, the regional multilateral banks, regional monetary authorities or some agencies of the UN that disburse funding. However, in practice, the term IFIs is understood to mean the two global IFIs – the Fund and the Bank. In recent years there has been growing discussion of the role of these institutions in the provision of international public goods (IPGs).

The reorganized Congress that emerged in Bengal in the 1920s adopted diverse methods of mobilization to build up its support base during the non-cooperation Khilafat movement. This chapter examines the nature of Congress interaction with popular politics between 1920 and 1922 when nationalist fervour acquired a great momentum.

The remodelled Congress, which developed strong village links in the wake of non-cooperation agitation, was sustained by ideological and political propaganda. While this initiative went a long way towards guiding the disparate economic grievances and a general anti-British feeling into a non-violent anti-imperialist struggle, equally important was the spontaneous self-mobilization of the masses and their conscious acceptance of the nationalist message of their leaders. The relationship between nationalist propaganda from above and the self-initiative of the people is therefore an interesting area of study.

The Congress leadership adopted various methods to mobilize different social groups and draw them into the non-cooperation movement. In the city of Calcutta, as well as in the countryside, mass meetings emerged as rallying points for a wide cross-section of people. The preliminary agitation among the Muslim masses was conducted by up-country Mohammedan leaders Sahukat Ali, Dr Kitchlew and Rafi-Ud-din Ahmed Qidwai who toured the province and held meetings at the mufassil centres to propagate anti-Turkish Peace Treaty campaigns. During this period several meetings were held to impart the message of boycott and Jehad against the foreigners even in such remote areas as Gunbati in the district of Tippera.

Rules of the Bengal Provincial Congress Committee

(Adopted at meetings of the Committee held on 12 February 1921, 15 February 1921 and 16 February 1921.)

1. The Bengal Provincial Congress Committee shall represent the Indian National Congress in the Province of Bengal and Surma Valley and shall act as for the Province in all Congress matters and take such steps as it may think proper to organize provincial, district and local Conferences and make rules for the conduct of their business and otherwise carry on the work of the Congress.

2. The Bengal Provincial Congress Committee shall be composed of members elected in manner hereinafter laid down.

3. The Bengal Provincial Congress Committee shall organize a District Congress Committee in each District (in accordance with the new Constitution of the Congress), which shall carry out the work of the Congress in the districts under its guidance and control. Such Committees shall abide by all the Rules framed and instructions issued by the Bengal Provincial Congress Committee.

Note: The city of Calcutta including the area within its Municipal Jurisdiction, shall for the purpose of these rules be treated as a District.

4. The District Congress Committees shall organize and establish local Congress Committees in such urban and rural areas as they consider necessary and such local committees shall abide by the rules and act under the guidance of the District Congress Committees subject to the control of the Provincial Congress Committees.

It is generally believed that ‘associations brought nineteenth century India across the threshold of modern politics’. The foundation of the Indian National Congress in 1885 was a landmark in the history of associations. Since then the complexities of modern politics have shaped its creed, character and composition both at central and local level.

Until the First World War the nationalist Congress confronted imperialism using techniques ranging from the policy of petitioning favoured by the Moderates to the passive resistance of the Extremists. By the end of the war however, nationalist politics began to reach sections of the populace who had earlier remained outside it. Their potential as active participants in modern politics could not be ignored. A point had been reached where institutional politics could not remain oblivious of the politics of the people. This set the trend for nationalist politics in future years as the two streams interacted, each moulding the other.

This work attempts to identify the links between institutional politics and the politics of the people, exploring its impact on both groups and also on the course of the nationalist movement, especially during the period of Gandhian nationalism. Rather than concentrate on the history of a locality at a specific time when the nationalist struggle was at its height, this study has tried to establish a link between micro and macro studies over a period of 20 years in order to broaden the perspective of nationalist politics.

The end of the civil disobedience movement once again witnessed a division in the Congress leadership in Bengal. One section within the party preferred to return to constructive social work to keep up mass contact. Others opted to contest elections for local boards and legislatures. The latter felt that ‘the members may not in principle recognize council entry as one of the means to fight the bureaucracy but it may reserve clear enunciation of its attitude towards the coming Reforms for future consideration.’ At the AICC meeting in May 1934 a new parliamentary board was formed to control electoral affairs. In Bengal, while Dr Bidhan Chandra Roy was in favour of the parliamentary programme, most Congressmen were opposed to council entry.

The Government Of India Act 1935 introduced provincial autonomy, which was to come into full force from 1 April 1937. Qualifications for inclusion in the electoral roll for the 1937 election was made dependent on taxation, property and education. However, the Act granted separate electorate to the Muslims. This meant that they would vote as a distinct political community and they were allotted 119 out of the 250 seats.

The act was expected to enfranchise 16,600,000 voters. While Congress expected to win seats in the general constituencies, it did not anticipate an uncontested victory. There were strong indications of a decline in the popularity of Congress because of general disillusionment at the failure of civil disobedience movement.

In many ways the First World War was a harbinger of change in Indian politics. Economic dislocation, inflated prices and government control on trade increased the hardships of the people, making them increasingly conscious of the oppressive nature of the rule of their imperial government. In Bengal the intellectual element pondered over the cause-and-effect relationship between the political situation and the economic condition.

The Bengali popular press was particularly vocal against colonial indifference to the economic plight of the people. The Viswamitra thought that ‘subjugation was the real cause of famine because the commercial policy of the government enabled the foreigners to exploit the land’. The Hitabadi too was of the opinion that the establishment of mills and factories had not benefited India and the artisan class was growing poorer. Dainik Bharatmitra argued that prospect of British capitalists opening more factories would mean further systematic exploitation. Samyavadi felt that to eliminate India's poverty it was necessary to ensure not only that the raw materials for manufacture came from India, but also that the manufacturers should themselves be Indians. British policy was held responsible for encouraging foreign exploiters and the Marwaris. The Bengali pointed out that the monopoly enjoyed by the Railways and the Steamer Company was the cause of high prices. The most insistent cry was against the export of rice. When the restrictions against interprovincial movements of rice crops were removed, it created a great stir.

Until 1919, the Congress as an organization did not have much connection with the grass roots. However, following the First World War, two broad factors contributed to the change in its structure. The Act of 1919 widened the franchise, which made Congress eager to extend its organizational network to provincial and district levels. This period also saw a considerable section of the Indian people being drawn into nationalist politics. The Congress could not ignore these changes. Therefore, when faced with the problem of adopting a new scheme of agitation in 1920, the Congress had to reform its constitution to gain a broad-based and permanent character.

On the final day of the Congress session at Nagpur in December 1920, delegates approved a new constitution for the Congress committee. The British Committee of Congress was dissolved along with its paper India. This marked the end of the politics of petitions. Henceforth, Congress leaders were to concentrate more on their own actions within India than on playing to the British gallery.

The new Congress constitution proposed the establishment of a working committee of 15 members, which was to function as a permanent Congress executive. From a loose federation of 200 members, the Congress became a more active and permanent organization. Congress circles were reorganized on a linguistic basis so as to extend the roots of its organization to the subdivision and taluka level.

The Chauri Chaura incident followed by the Bardoli Resolution brought the non-cooperation movement to a sudden halt. Its participants were left without any clearly defined and intelligible objective and the result was confusion. But once the initial despair was overcome, the non-cooperators began to reconstruct a programme on lines that would appeal to the popular imagination.

In Bengal, the Bardoli Resolution slowed down the pace of preparation for civil disobedience. In some places like Noakhali, Birbhum and parts of Rajshahi the activities of volunteers picketing excise shops did not stop stop immediately, but at Rangpur, in Gaibandha and Kurigram, the volunteers began to follow the Bardoli Resolution programme and engaged themselves in social reconstruction. In most of the districts, constructive social work, such as popularizing the use of charka among the poorer people, continued unhampered. Organizational reconstruction, like enlistment of Congress members by district Congress committees, also continued as usual. Official records show that ‘almost everywhere, the political atmosphere remained calm, marked by a general disappointment among the people’.

Earlier in 1922, Chitta Ranjan Das and his lieutenants were arrested in connection with the boycott of the visit of the Prince of Wales in December 1921 and the BPCC was dominated by Shyam Sundar Chakrabarti and his followers. Later in the Chittagong conference of 1922 C R Das introduced the concept of obstruction and non-cooperation from within the council.

The resolution of Purna Swaraj adopted by the All-India Congress in Lahore resuscitated nationalist spirit, despite the hardships caused by the international economic crisis of 1930. According to official reports the resolution of independence and the decision to celebrate Independence Day on 26 January initially aroused little enthusiasm in Bengal. The major reason, as cited by the magistrate of Rangpur was ‘rivalry of leadership and split in the Congress itself’.

Yet as Gandhi launched his Dandi March and placed before the public a positive programme, the salt satyagraha, enthusiasm for civil disobedience developed rapidly in Bengal. An All-Bengal Council of Civil Disobedience was formed and it was decided to violate the salt law in the coastal districts of Chattogram, Noakhali, Barisal, Khulna, 24 Parganas and Midnapur. Every district was to form a civil disobedience committee comprised of the important personalities of the district suder and mahakuma and also make provisions for raising funds. The civil disobedience movement, with its clear anti-imperialist agenda, once again helped to crystallize efforts towards linking elite politics and the relatively spontaneous politics of the people into an organized movement.

The civil disobedience movement in Bengal was organized by special Congress district civil disobedience committees which were affiliated to the local Congress committees. Satyagraha camps were organized to train volunteers who would spread the message of civil disobedience to the far corners of the province and carry on the movement.